Special Risk Capital Management LLC

Wait For It ! September 10, 2011

As the British would say . . . “Wait for it!” And that’s what we have to do. We continue to be in a very broad trading range (see last weeks post for the chart), and that may continue for a while. If we want to invest and go with the trend, we’re going to have to be patient, because a breakout could go either way.

Case in point is the continued saga of the European Union (EU). despite the news, it’s not about Greece, the markets are looking ahead to what happens after Greece. The Spanish, Italian and Portuguese economies are far larger and more critical than Greece. If Greece gets bailed out . . . does everyone? Tough choices lie ahead. The story will take many months to unfold, so the world markets could whipsaw back and forth for some time. No clear path means no trend.

The flip side is that corporate profits are generally holding up quite well. Even a hint of economic recovery, especially in the US, will drive this market up, up and away. I see that dichotomy now in the market. Below is the S&P 1500 component stocks; the chart shows the price strength relative to recent price ranges.

Not to dwell on details, but “Green is Good” (prices in the upper range), Yellow is Neutral (price in mid-range) and “Red is Bad” (prices in their lower range). This looks pretty grim . . . not much Green. But . . . .

The next chart shows “money flow” into / out of these same stocks.

About as much Green (accumulation) as Red (distribution), with a whole bunch of Yellow (neutral). This is NOT wildly Bullish, but it is also NOT wildly Bearish either . . . . just a lot of “neutral”.

What to make of it? Prices are very weak, but there is not an exodus of selling (right now). Trading volume continues to be rather light, the big guys are waiting, and so am I. Strong sectors: BioTech, healthcare, mining, pharma, food (all defensive areas). Government bonds and precious metals are still strong, tho rather extended; we’re closer to the top than the bottom; caution.